If you are a mutual fund investor other than an Individual or listed company or its majority owned subsidiary, then you must be aware of the Ultimate Beneficial Ownership (UBO) requirement for KYC (Know Your Customer) compliance. Let us understand what is the purpose of this requirement and why it is important to comply with it.

Identification of the UBO is a part of the anti-money laundering requirements stemming from the Prevention of Money Laundering Act, 2002 (PMLA) which came into effect from July 1, 2005. The mutual fund regulator, SEBI (Securities & Exchange Board of India), subsequently mandated that all mutual funds should formulate and implement a policy framework as per the guidelines on anti-money laundering measures.

Understanding anti-money laundering requirements

Let us begin by understanding what money laundering is and how it affects you. Money laundering is an illegal act by which criminals disguise the ownership and control of funds by making them appear to have stemmed from a legal or legitimate source.

In most cases, money launderers hide their intent within a series of actions and transactions. Money laundering is a serious crime that affects the stability of the economy worldwide. It reduces tax revenue and loss of revenue results in a higher burden on honest taxpayers.

What is anti-money laundering?

Anti-money laundering (AML) implies a set of regulations or laws that have been created to prohibit illegal criminal practices from generating income through financial system.

The AML laws require banks, financial institutions and SEBI registered intermediaries to follow complete due-diligence procedures with customers to ensure that they are not aiding money-laundering activities in any manner. In order to comply with these requirements, asset management companies seek to identify suspicious transactions by knowing their customers and understanding the reasoning behind the transactions they carry out. Providing information about beneficial ownership is applicable to all categories of investors except Individuals and a Company listed on a stock exchange or a majority owned subsidiary of such a Company.

Mutual funds conduct customer due diligence by identifying the investors and verifying their identity on the basis of documents, data or information obtained from a reliable and independent source such as a registered intermediary.

Information required for AML compliance

Declaration form for ‘Ultimate Beneficial Ownership’

Proof of Identity of the UBO - Copy of PAN Card/Passport

In-person verification (IPV)

Impact of non-compliance

Compliance is critical. Non-compliance can result in increased scrutiny, discontinuation of accounts and transactions, reporting to Financial Intelligence Unit – India (FIU-IND) - an independent body that reports directly to the Economic Intelligence Council headed by the Finance Minister of India for further action.

Conclusion

A standardized KYC process, in-person verification for AML compliance, non-acceptance of third-party cheques, redemption pay outs to registered bank accounts only are essentially measures that are intended to safeguard against money laundering. While some of the procedures may seem cumbersome, they help in creating financial transparency which is a key priority in the battle against money laundering and criminal practices.